The market maker

First of 2 parts

THE Wholesale Electricity Spot Market (WESM) has been in operation in the Philippines since June 2006 and plays a critical role in ensuring that the Philippines has a functioning electricity sector. In fact, the largely privatized power sector created by the Electric Power Industry Reform Act of 2001 (Epira) most likely would not be able to exist without the WESM.

In spite of its importance and very real effect on every electricity consumer in the Philippines, the role and function of the WESM are not well understood by the public. To gain some insights into what WESM does, why it is important, and what the future holds for the market and the broader electricity sector in the Philippines, I sat down with lawyer Richard J. Nethercott, who is the president and chief executive officer of the Independent Electricity Market Operator of the Philippines (IEMOP).

Background

The WESM was created pursuant to the Epira law to serve as a centralized market for electricity, where prices would ideally be governed by supply and demand. To manage the WESM, the Philippine Electricity Market Corp. (PEMC), a nonstock, nonprofit corporation put together by the Department of Energy (DoE), was formed in 2003. In 2018, the operation of the WESM was transferred to IEMOP, with PEMC remaining in a governing role.

After about a two-year development period, the WESM commenced commercial operations for the Luzon grid in June 2006. The Visayas grid was integrated into the WESM in December 2010, while an interim market was launched for Mindanao in September 2013 to help address what was, at the time, a serious supply deficit on the country’s second-largest island.

The Mindanao market was eventually transformed into a permanent spot market and launched commercially in January 2023 in anticipation of its integration with the market covering the rest of the country once the MindanaoVisayas interconnection was completed. That link, which closes the last gap in the national grid, was supposed to be completed in March 2023, but after some delays, it was only made fully operational in January of this year.

Meanwhile, the WESM launched two new market expansions, the interim Renewable Energy Market in August 2022 and, most recently, the Reserve Market in January 2024.

Misunderstood role

For most consumers, news of activity in the WESM most often seems to come in the form of bad news for their monthly electric bills: a notification of an increase in the generation charges due to “higher generating costs for power purchased through the WESM” for unplanned reasons, such as a shortage of supply caused by a number of power plants shutting down unexpectedly. Thus, there seems to be a common public perception that the WESM is a sort of expensive “last resort” for electricity distributors to make up supply deficits and something that should be avoided if at all possible.

To be fair, the above scenario does occur, but far less often than it may seem. In reality, according to an extensive data brief provided by IEMOP for this interview, “normal” pricing conditions, that is, pricing that is not subject to the secondary price cap, market intervention, network congestion, or other errors — all conditions that lead to higher prices — prevail about 90 percent of the time; 87.35 percent throughout 2023, and 93.49 percent so far this year, according to IEMOP’s most recent pricing conditions report.

“On pricing, I would not say that WESM is the lowest, but that it’s competitive,” Nethercott commented. Market records tend to support that assessment. While WESM prices do fluctuate — they are registered at 5-minute intervals in the market — for 2023, WESM recorded a load-weighted average price (LWAP) of P6.07 per kilowatt-hour (kWh) and an average effective spot settlement price of P6.44/kWh. Both figures are considerably less than in 2022, when the average prices were P7.72/kWh and P7.88/kWh, respectively.

When asked how he would describe the value of the WESM to the country’s overall energy market, Nethercott explained: “I think the biggest benefit of WESM is that it provides flexibility. If you recall, in the period between privatization (with the enactment of the Epira) and when the WESM became operational, expensive power rates were a serious issue in many parts of the country.”

The reason for this, Nethercott continued, is that the supply contracts between newly privatized independent power producers (IPPs) and electricity distributors and cooperatives — with the latter being particularly badly affected — were mostly take-orpay contracts, meaning that the distributor would pay for the full capacity contracted, whether it was used or not. “In order not to run short of supply, many cooperatives over-contracted,” Nethercott said. “This meant that rates were high because their customers were paying for power that was not used.”

“What the WESM does is allow distributors and cooperatives to manage their supply needs efficiently,” Nethercott continued. Instead of contracting for more supply than is needed in order to provide a buffer against running short, a problem that would be very expensive to correct, electricity distributors and cooperatives can balance their anticipated supply needs between bilateral power supply agreements with generators and the spot market, so that “the cooperatives, and their customers, are paying only for what they need.” (To be continued)